Excerpt:.....is not eligible for weighted deduction under section 35b, which has been made clear in the special bench decision in the case of j. hemchand & co. (supra), relied upon by the learned departmental representative. para 23 of that decision reads as follows : before concluding this part of the order rendered commonly for all the appeals heard together, we may also refer to the arguments advanced on the side of some of the assessees that in the case of manufacturer producing goods for export, as the case of a trader procuring goods for the same purpose, everything spent by the former on the production of the exported goods and by the latter on the purchase and procurement of such goods should be taken as expenditure entitled to benefits under sub-clause (hi). the trend of the argument is.....

Judgment: 1. The revenue in these appeals has disputed the orders of the Commissioner (Appeals) directing the ITO to allow weighted deduction under Section 35B of the Income-tax Act, 1961 ('the Act') in respect of the payment of salary and travelling expenses which were paid by the assessee on behalf of the principals to the employees.

2. During the years under consideration, the assessee was under a contract for the supply of labour to the Japanese company by name of Ishikawajima-Harima Heavy Industries Co. Ltd. at Tokyo, Japan (IHJH), for the erection of units of ING tanks on Das Island, in Abu Dhabi. The contract was dated 24-12-1973, according to which, whereas IHH, undertook to erect and deliver the two units of ING tanks on Das Island. In accordance with the contract executed between Eastern Bachtel Corporation and IHH and whereas IHH desired to let the contractor, that is the assessee, to supply labours for the erection site under the terms and conditions as set out in the aforesaid contract, it was agreed among other things that the assessee was to supply necessary personnel and labour mainly in order that IHH might carry out erection of ING tanks on Das Island. The assessee agreed that the labour to be supplied by it would engage themselves in work other than erection work of ING tanks whenever the site Manager of IHH asked them to do so. Details of the contract are mentioned in the formal copy of the contract which is filed before the Tribunal. The payment for the work done by these persons on this contract was to be made by IHH to the assessee, who was expected to make the necessary payments to persons for the work done by them. The ITO was of the opinion that the assessee was not entitled to the weighted deduction under Section 35B in respect of the salary and wages paid by the assessee to the workers engaged on this job. The ITO also disallowed the assessee's claim for weighted deduction in respect of the travelling expenses payable to the workers.

3. The assessee, therefore, took up the matter before the Commissioner (Appeals), who noted that under similar circumstances where the assessee had undertaken similar labour supply contract in Singapore and elsewhere, the Bombay Bench 'E' of the Tribunal in IT Appeal Nos. 3364 and 997 (Bom.) of 1976-77, decided on 31-3-1977, after considering the nature of the assessee's business, came to the conclusion that the assessee was entitled to weighted deduction on the entire expenditure incurred by the foreign office, in respect of the salaries and wages of the technicians sent from India. This was for the years 1972-73 and 1973-74. Under similar circumstances for the assessment years 1971-72, 1974-75 and 1975-76, the Commissioner (Appeals) granted relief under Section 35B. The Commissioner (Appeals), who decided the appeal of the assessee for the years under consideration, namely, for the assessment years 1976-77 and 1977-78, therefore, allowed the assessee's appeals.

4. The revenue has, therefore, filed the present appeals before the Tribunal objecting to the orders of the Commissioner (Appeals). During the course of the hearing of the appeals filed by the revenue, the learned departmental representative submitted that the Tribunal's orders for the years 1972-73 and 1973-74 were passed on 31-3-1977.

Thereafter the Special Bench of the Tribunal had in the case of J.Hemchand & Co. v. Second ITO (IT Appeal Nos. 3255 arid 3330) (Bom.) of 1976-77 had an occasion to examine the entire question of the grant of relief to any assessee under Section 35B in respect of the supply of goods, services and facilities outside India. They had laid down detailed conditions under which relief under various clauses of Section 35B(\)(b) of the Act could be granted. Initially it was the learned departmental representative's case that the facts of the case were not examined with reference to the criteria laid down by the Special Bench of the Tribunal in the case of J. Hemchand & Co. (supra). It was, therefore, not possible to say whether the assessee was, in fact, eligible for the relief admissible under Section 35B. We, therefore, specifically asked the learned departmental representative to point out which criterion or principle laid down in the case of J. Hemchand & Co.

was not satisfied in the assessee's case in respect of the payment of salaries and allowances to its employees stationed abroad.

Unfortunately, he was not in a position to point but the same.

5. As against this, learned counsel for the assessee has proceeded to point out that for the assessment years 1972-73 and 1973-74 the Bombay Bench 'E' of the Tribunal by their order dated 31-3-1977 in IT Appeal Nos. 3364 and 997 (Bom.) of 1976-77 in the assessee's own case held that the assessee was eligible for relief under Section 35B under similar circumstances. This decision of the Tribunal was accepted by the department, and no reference application was filed under Section 256(1) of the Act by the revenue authorities. Further, the decision was followed by the Commissioner (Appeals) in his orders dated 4-1-1979 for the assessment years 1971-72, 1974-75 and 1975-76. Even this decision of the Commissioner (Appeals) was accepted by the revenue authorities, and not even an appeal was filed before the Tribunal. The learned counsel for the assessee has proceeded to rely on the Madras High Court decision in the case of CIT v. S. Devaraj [1969] 73 ITR 1 and on the Bombay High Court decision in the case of H.A. Shah & Co. v. CIT [1956] 30 ITR 618, according to which under identical facts and circumstances, the Tribunal was under an obligation to follow their earlier decision and not to express dissenting views concerning the issues involved.

6. We have carefully considered the facts and circumstances of the case. It is not the case of the appellant/revenue authorities that the facts of the case of the earlier years, when reliefs under Section 35B have been given to the assessee, are any different. The facts are identical. Under identical circumstances, the assessee has proceeded to provide labour to parties outside India for carrying out civil contracts. In the earlier years, the Tribunal and the Commissioner (Appeals) have granted this relief under Section 35B(1)(6)(viz) treating it as expenditure having been incurred for the purposes of services outside India in connection with or incidental to the execution of any contracts for the supply outside India of such services. Contract for furnishing labour abroad has been treated as contract for services abroad. The decision has been accepted by the revenue authorities. No fresh facts or distingiushing features have been brought to our notice for the years under consideration. According to the Bombay and the Madras High Courts' decisions, relied upon by the assessee, and also further according to the Madras High Court decision in the case of CIT v. L.G. Ramamurthi [1977] 110 ITR 453, we are more or less bound to follow our earlier decisions on the subject and grant the same relief to the assessee. We shall do likewise. We shall follow earlier decision on the subject and hold that the assessee was entitled to relief under Section 35B (1)(b)(viii) in respect of salaries and allowances in dispute. In the circumstances, the order of the Commissioner (Appeals) call for no interference The appeals filed by the revenue are hereby dismissed.

Per Shri P.S. Dhillon, Judicial Member - I have gone through the order of my learned brother, Shri D.V. Junnarkar, Accountant Member, carefully, but it is my misfortune that I am not able to reconcile myself with his conclusions and reasons, since I am of the view that the appeal of the revenue is to be allowed. Hence, I state my reasons and conclusions for the same.

2. There is no dispute that Section 35B allows weighted deduction on the items of expenditure on export enumerated in clauses (i) to (viii).

Therefore, it is to be seen what is meant by expenditure, on the facts and circumstances of the case. For this purpose, I cite an illustration : 'A' engages 'B'-a skill worker (carpenter) for a day for a sum of Rs. 25, provided that 'B' will have his own food and tea for the whole day. 'B' agrees to it, and works for a day with 'A' or with 'C' who asks him to work. However, 'A' on his own sweet will, supplies food and tea to 'B' costing Rs. 10. The sum of Rs. 25 is the purchase price of the skill of 'B', while Rs. 10 is the expenditure of 'A' on 'B' for the day. Thus, it is clear that the skill is having its value (cost price) and this cost price is not expenditure of 'A' on 'B' rather Rs. 10 only is the expenditure. So, the expenditure of 'A' is only Rs. 1.0 for the performance of services outside India in connection with or incidental to the execution of any contract for the supply outside India of such services.

As I have stated above, the provision of Section 35B are applicable only to an assessee who incurs expenditure in respect of goods, services or facilities. So, 1 have to see that what is it that the assessee has exported. It must be either services or facilities. It cannot be goods or it cannot be facilities either. It could only be services in the case of the assessee, since the contract makes it clear that the assessee is a dealer in skilled and unskilled labour, on account of the following terms mentioned in the contract : Whereas IHH desire to let the contractor as the sub-contractor of INI to supply labourers to the erection site under the terms and conditions as hereinafter set forth ; And whereas the contractor is willing to perform faithfully the labour supply under the instruction and supervision of IHH all in accordance with the terms and conditions of this contract.

Thus, from the aforesaid terms and conditions of the contract, it is clear to me that the contractor (the assessee), is to supply necessary skilled personnel and labour. Therefore, it is manifestly clear that the assessee is a supplier of labour which cannot be termed as 'services' as envisaged in Section 35B.3. The claim in dispute is in respect of the wages paid by the assessee to the labourers. The specific clause, under which it is claimed by the assessee, is Section 35B(1)(b) which is as under : The expenditure referred to in Clause (a) is that incurred wholly and exclusively on- (viii) performance of services outside India in connection with or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities.

This specific clause was examined by the Bombay Bench 'B' of the Tribunal consisting of Shri T.D. Sugla, President, and Shri S.N. Rotho, Accountant Member, in IT Appeal No. 1858 of 1979 in the case of S.Bestow Cement Co. Ltd., who by their order dated 8-10-1980, held that Sub-clause (viii) (supra), as they understood, covers such expenses which an exporter incurs in performance of services outside India, after the goods have been delivered to or received by the foreign buyers. It is thus clear from it that the expenses have to be incidental to the supply of services, and not expenses for acquiring the services itself. So, in view of this, and the facts and circumstances of the case, as stated above, I am of the opinion that the assessee is a dealer in labour, and labour is his stock-in-trade, since he supplies labour to IHH. In order to supply labour, it must acquire the labour first and to do so, it has to settle the value of the skill of the labour which is the price of the skill of the labourer, and the same is represented by the wages paid to the labourers. For these services, the assessee gets from IHH a higher payment. Thus, by supplying labour the assessee has hired, he is making a profit (sic). So, the labour is on par with goods. Now, the cost of acquiring goods is not eligible for weighted deduction under Section 35B, which has been made clear in the Special Bench decision in the case of J. Hemchand & Co. (supra), relied upon by the learned departmental representative. Para 23 of that decision reads as follows : Before concluding this part of the order rendered commonly for all the appeals heard together, we may also refer to the arguments advanced on the side of some of the assessees that in the case of manufacturer producing goods for export, as the case of a trader procuring goods for the same purpose, everything spent by the former on the production of the exported goods and by the latter on the purchase and procurement of such goods should be taken as expenditure entitled to benefits under Sub-clause (Hi). The trend of the argument is that without the production or the procurement of such goods, their distribution or supply is impossible and, hence, the expenditure incurred on the former will form part of the expenditure incurred on the latter. The contention is clearly untenable. The section, as a mere reading of it clearly indicates, covers expenditure incurred on specified activities in respect of goods, services or facilities which the assessee deals in or provides in the course of his business. Clearly, therefore, the activities referred to therein are those undertaken at a stage after the goods are brought into existence whether by manufacture or by purchase and procurement, as commodities for export Activities of distribution and supply of goods are to commence only after the goods themselves are made ready. In other words, Section 35 B, to our mind, provides for weighted deduction in respect of expenditure on some specified activities in relation to or in connection with the export of goods, services or facilities which are peculiar and in addition to the normal expenditure incurred by a dealer, if he is not exporting them. That being so, it would be futile to contend that production and procurement of goods would also form an integral part of their distribution and supply. We, therefore, find it impossible to accede to the assessee's contention that expenses incurred by way of cost of the goods exported should also be taken as attracting the benefit of Sub-clause (iii).

As in view of this discussion, the cost of production or procurement of goods cannot be eligible for weighted deduction under Section 35B, the cost of procurement of services also cannot be eligible for such deduction.

4. Thus, in my opinion, the expenses incurred are on the procurement of services, which is the assessee's stock-in-trade, and it is not eligible for weighted deduction under Section 35B.5. Sub-clause (viii) is also not applicable as the order of the Tribunal in the case of S. Bestow Cement Co. Ltd. (supra) shows that the expenses should be incidental to the supply of the services and not cost of the services itself. Besides, Sub-clauses (2) and (3) of Clause (b) of article IV of the contract dated 24-12-1973 between the assessee and IHH, shows that the travelling charges and demobilization expenses are to be borne by IHH. Moreover, the record shows that the claims are paid by the assessee on behalf of the principals. Such being the position, there is no question of these items of expenditure having been incurred by the assessee.

6. Thus, in view of my above discussion and the reasons thereto, it can be safely held that Sub-clause (viii) of Section 35B(1)(6) is not applicable to the facts and circumstances of the case, in view of the decision of the Special Bench of the Tribunal in the case of /.

Hemchand & Co. (supra), and that of the Tribunal in S. Bestow Cement Co. Ltd. (supra).

7. However, the contention of Shri Trivedi is that when the facts of the year under consideration are identical with those of the years 1971-72 to 1975-76, then, in view of the decision of the Hon'ble Madras High Court in the case of L.G. Ramamurthi (supra), the decision in the year 1972-73 is to be followed, the decision of the Tribunal has been accepted by the revenue. I do not see any force in the contention of Shri Trivedi, because the contention of Shri Srinivasan, learned departmental representative, is well founded, when he says, (f) that the decision of the Special Bench of the Tribunal in the case off.

Hemchand & Co. (supra) was given after the decision of the Tribunal in the assessment year 1972-73, (f) that the case in the year under consideration is distinguishable as the contention raised by him is that Sub-clause (viii) of Section 35B(1)(b), as discussed above, is not applicable to the facts and circumstances of the case, in view of the fact that weighted deduction cannot be allowed on the cost of supply of services, or amounts of reimbursement, (III) consequently, that the principles of res judicata and estoppel are not applicable to the income-tax proceedings, and (iv) that each assessment year is separate and the Tribunal is not bound to follow its earlier decision on the question of law, but rather it should follow its own decision on the finding of fact. Hence, I accept it. It is also clear to me from the decision of the Hon'ble Madras High Court in L.G. Ramamurthi's case (supra) that the Tribunal is to follow its finding of fact and not that on question of law : It is worthwhile emphasising that if a Bench of a Tribunal on the identical facts is allowed to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on an earlier occasion, that will be destructive of the institutional integrity itself. That is the reason why in a High Court, if a single Judge takes a view different from the one taken by another Judge on a question of law, he does not finally pronounce his view and the matter is referred to a Division Bench. Similarly, if a Division Bench differs from the view taken by another Division Bench, it does not express disagreement and pronounce its different views, but has the matter posted before a Fuller Bench for considering the question. If that is the position even with regard to a question of law, the position will be a fortiori with regard to a question of fact. If the Tribunal in the present case wanted to take an opinion different from the one taken by the earlier Bench, it should have placed the matter before the President of the Tribunal so that he could have referred the case to a Full Bench of the Tribunal, constituting three or more members for which there is provision in the Act itself." (p. 467) 8. Therefore, following this decision with respect, I hold that in view of the decision of the Special Bench of the Tribunal in the case of J.Hemchand & Co. (supra) where the special Bench of the Tribunal had laid dawn the scope and ambit of Section 35B and the Tribunal's order in the case of Bestow Cement Co. Ltd. (supra) laying down the scope of Sub-clause (viii) of Section 35B the earlier decisions of the Tribunal in the case of the assessee are not to be followed. On these grounds, that the Tribunal is to follow its own decisions, the appeal of the revenue cannot be dismissed.

9. In view of my above discussion and the reasons thereto, I hold that on the facts and circumstances of the case and in law, the Commissioner (Appeals) erred in directing the ITO to allow weighted deduction under Section 35B, on payment of salary of Rs. 26,27,169 and travelling expenses of Rs. 1,20,675 and Rs. 6,25,487 in the assessment years 1976-77 and 1977-78, respectively which were paid by the assessee on behalf of its principals. Hence, I set aside the impugned orders of the Commissioner (Appeals) and thereby restore that of the ITO for both the years under consideration, as he rightly disallowed the claim for weighted deduction on the aforesaid items of expenditure.

1. On a difference of opinion between the learned members who heard the appeals originally, the following point of difference was stated : Whether, in the facts and circumstances of the case, the CIT (A) was justified in granting relief under Section 35B to the assessee in respect of payment of salary of Rs. 26,27,169 and Rs. 1,20,675 ; and travelling expenses of Rs. 2,85,480, and 6,25,487, which were paid by the assessee on behalf of the principals The point of difference has been assigned by the President to himself under Section 255(4) of the Act, for disposal.

2. The proceedings relate to the assessment years 1976-77 and 1977-78 during which the assessee was under a contract for supply of labour to a Japanese company IHH, for the erection of the two units of ING tanks on Das Island in Abu Dhabi. According to the contract, the assessee was to supply labour at the erection site under the terms and conditions set out in the contract dated 24-12-1973. The short question that arose for consideration was whether the assessee is or is not qualified for weighted deduction in respect of salary and travelling expenses paid to the aforesaid labour. The ITO rejected the assessee's claim. On the other hand, the Commissioner (Appeals) allowed the assessee's claim, following the Tribunal's decision in IT Appeal No. 3364 (Bom.) of 1976-77 dated 31-3-1977. The learned accountant member has referred to this issue in paragraphs 4 and 5 of his order and for reasons given in paragraph 6 he has upheld the order of the Commissioner (Appeals). The main plank of his argument is that no fresh facts or distinguishing features were brought to his notice for the years under consideration and that as held by the Bombay High Court in the case of II. A. Shah (supra) and the Madras High Court in the case of L.G. Ramamurthi (supra), the Tribunal was bound to follow its earlier decision on the same facts and circumstances. The learned judicial member has been of the view that the Madras High Court decision provides for taking a different view in case a Special Bench of the Tribunal has taken a contrary view, in the meanwhile. According to him, the Special Bench of the Tribunal clearly provided for non-allowance of the weighted deduction on such expenses under Section 35B. He has, accordingly, set aside the order of the Commissioner (Appeals) on the issue, and restored the order of the ITO.3. It is reiterated before me by Shri Y.P. Trivedi, the learned counsel for the assessee, that in the earlier years, the Tribunal has decided the issue in favour of the assessee on identical facts and circumstances and that as held by the Bombay High Court in the case of H.A. Shah (supra) and the Madras High Court in L.G. Ramamurthi (supra), it was only proper for the Tribunal to follow its earlier decision. On merits, Shri Trivedi has invited my attention to a circular dated 4-9-1975 issued by the CBDT which, according to him, supported the view taken by the learned Accountant Member. It is stated that circulars issued by the Board in favour of the assessee are binding on the departmental authorities and as such it does not the in the mouth of the departmental representative to contend that the weighted deduction should not be allowed on salary and travelling expenses of the labour supplied by the assessee abroad. On the other hand, Shri T.S.Srinivasan, the learned departmental representative, has strongly relied on the Special Bench decision in the case of J. Hemchand & Co.

(supra) and the order of the learned judicial member. It is submitted that the Board's circular is not applicable in the facts and circumstances of the case and the Bombay and Madras High Courts decisions are also not applicable in view of there being a Special Bench decision of the Tribunal taking a contrary view.

4. I have heard the parties and carefully gone through the orders of the learned member as well as the Board's circular dated 4-9-1975. No doubt Section 35B applies to expenses which are not only in respect of goods but also in respect of services of facility which the assessee may be dealing or providing in the course of the business. However, the assessee's business, according to me, is that of supply of labour and as such, the cost to acquire the necessary labour in the hands of the assessee is like the cost of the goods the assessee deals in. There is no dispute that the salary payments herein represented the salary paid to the labour which the assessee supplies to the Japanese firm for its erection of a plant in Abu Dhabi and travelling expenses represented the expenses of such labour for their being transported to the place of destination. In this manner, both the salary payments to the labour and the travelling expenses fall clearly within Sub-clause (Hi) of Section 35B(1)(6). Having regard to the above discussion, I am in agreement with the learned judicial member that on the facts of it, such items of expenditure in the case of the assessee would not qualify for weighted deduction under Section 35B.5. However, the assessee may still succeed in the case if its case squarely falls within the four corners of the Board's circular dated 4-9-1975. With this end in view, I have carefully gone through the circular. It may be mentioned that the contract contemplated by the Board in its circular, is that of execution of a contract involving supply of material and labour outside India. Therefore, the contract was for erection of a plant or building abroad and the expenditure on the supply of raw material has been specifically held not to qualify for weighted deduction. This to my mind, clearly shows that in the case of a contractor of pure and simple labour supply, the amount paid to the labour, both as salary and travelling expenses, is in the nature of cost of raw material and will not qualify for weighted deduction.

6. I am also in agreement with the learned judicial member, that there* being a Special Bench decision of the Tribunal taking a contrary view, the Bombay and Madras High Courts decisions will not stand in the way of taking a proper and correct view on the issue. Therefore, I hold that the assessee does not qualify for the weighted deduction in respect of these claims of expenditure.

7. In the result, the appeals will go to the other Bench for decision in accordance with the majority view.